The Wells Fargo-First Interstate Merger : PASSING OF A GIANT : First Interstate's Main Legacy Is That of Its Unfulfilled Potential

Throughout much of its 38-year history, First Interstate Bancorp was like the bright student whose grades never quite measure up: It fell far short of its potential despite a multistate franchise that was once the envy of the banking industry.

Founded in 1958 when Transamerica Corp. spun off its banking interests, First Interstate is set to fade into history after agreeing Wednesday to be acquired by archrival Well Fargo & Co. for $11.6 billion.

First Interstate has a history of aggressive acquisitions that made it a major player in California finance and a huge employer in Southern California. They also gave First Interstate a network stretching across 13 Western states and assets of $58 billion.

But First Interstate also was dogged by complaints that it seldom seized on the possible benefits of a banking system that sprawled like an octopus through the Western U.S. Critics said the bank more resembled a 12-cylinder engine that never seemed to be in tune.

Although First Interstate's financial performance improved in the last two years under Chairman William E.B. Siart, its long-term performance was disappointing, said Harry Keefe, a veteran bank analyst and investor in New York who began following First Interstate in the 1960s.

Economic slumps and severe loan troubles in certain states were part of the problem. But so too were bloated costs, and that's virtually certain to change under the new management, which is known for its aggressive cutting.

"Now I think the potential of this [First Interstate] franchise can finally be realized under Wells management," Keefe said.

While First Interstate had a multistate presence long before it became the rage in the banking industry, it was unable to manage those operations efficiently, critics said. The bank always struggled to eliminate or merge redundant operations throughout its network.

But it never really succeeded, resulting in overhead costs that were too high, earnings and stockholder returns that were too low and a corporate culture that was bureaucratic and slow-moving.

From 1987 through 1992, First Interstate never achieved the banking industry's main yardstick of successful profitability, which is to earn at least $1 on each of the $100 of assets the bank has at its disposal.

That so-called return on average assets has been much better in the last two years, thanks partly to an improving economy, a drop in bad loans and cost cutting. In 1995, for instance, First Interstate earned $1.59 per $100 of assets.

First Interstate initially was called Firstamerica Corp., then Western Bancorporation in 1961. It adopted its current name in 1981.

In the 1970s and '80s, under the guidance of then-Chairman Joseph Pinola, First Interstate went on its acquisition spree in other Western states. Although banking regulations underwent major changes in those decades, grandfather clauses in the rules enabled First Interstate to keep its system intact.

Pinola and his successor, Edward Carson, also kept First Interstate independent despite a spree of mergers and acquisitions that saw many banks disappear, such as Security Pacific National Bank and Crocker National Bank. (First Interstate even made an audacious, if unsuccessful bid, to buy giant BankAmerica Corp. in 1987.)

Indeed, by the time Carson handed over the chief executive reins to Siart last year, First Interstate stood as the only major U.S. bank still headquartered in Los Angeles.

As a testament to its standing, the tallest building in the West--the 73-story First Interstate World Center--bears its name and executive offices. First Interstate's brass moved into the structure in mid-1989 from the 62-story First Interstate Bank Tower on Wilshire Boulevard, although the bank still occupies the older building as well.

But critics complained that First Interstate's new headquarters was only a bright facade that masked the deep problems.

In the late '80s and early '90s, for instance, severe economic woes in different Western states caused massive loan delinquencies and saddled First Interstate with huge losses. First it was Texas, then Arizona, then Nevada and then California as a deep recession and real estate collapse took hold there.

The result: a $604-million loss for First Interstate in 1987, a $125-million loss in 1989 and a $288-million loss in 1991. Adding to the grim picture was a fire that swept through several floors of the First Interstate Bank Tower in May 1988.

First Interstate's stock, which ended 1987 at $39.25 a share, stood at only $30 a share four years later. The bank also had to slash its quarterly dividend by 60% in 1991.

But in 1992, the stock began a gradual ascent that reflected improvement in First Interstate's results, and the dividend was hiked again in 1993. The stock, having pierced $100 a share in mid-1995, then shot up further in October when Wells launched its takeover bid.